How Life Settlement is Similar to Reverse Mortgages

Life settlements and reverse mortgages are both financial options that allow older individuals to access the equity in their assets. However, they are fundamentally different in terms of the terms of the loan, the intended use of the funds, and the overall risks and benefits for the borrower.

A life settlement is a financial arrangement in which an individual sells their life insurance policy to a third party for a lump sum payment. The seller receives a cash payout in exchange for transferring the ownership and beneficiary rights of the policy to the buyer. The buyer pays the premiums on the policy and becomes the beneficiary upon the death of the insured individual. Life settlements can be a good option for individuals who no longer need or can afford their life insurance policies and want to monetize them.

On the other hand, a reverse mortgage is a loan that allows homeowners who are 62 years of age or older to access the equity in their homes. The loan is secured by the home and does not need to be repaid until the borrower sells the home, moves out, or passes away. Reverse mortgages can be a good option for homeowners who need additional income in retirement but do not want to sell their homes.

One key difference between life settlements and reverse mortgages is the intended use of the funds. In a life settlement, the funds from the sale of the life insurance policy are paid to the seller in a lump sum. The seller can use the funds for any purpose, such as paying off debts, funding retirement, or paying for medical expenses. In a reverse mortgage, the funds are paid to the borrower in regular installments or as a lump sum, and the borrower must use the funds for home-related expenses, such as property taxes and insurance.

Another key difference is the terms of the loan. In a life settlement, the seller receives a lump sum payment in exchange for transferring the ownership and beneficiary rights of the policy to the buyer. There is no loan, the funds are paid as a lump sum. In a reverse mortgage, the loan is secured by the home and does not need to be repaid until the borrower sells the home, moves out, or passes away. The terms of the loan, such as the interest rate and fees, are determined by the lender and are based on the borrower's age, the value of the home, and the lender's policies.

There are also significant differences in the risks and benefits for the borrower in a life settlement versus a reverse mortgage. In a life settlement, the main risk for the seller is that they will receive a lower payout for their policy than the policy is worth. This can happen if the policy has a low cash value, a seller works with an agent who does not specialize in life settlement (and who takes a large commission) or if a buyer is not willing to pay a high price for the policy. Additionally, the seller may not have enough time left on the policy to make the sale worthwhile. In a reverse mortgage, the main risk for the borrower is that they may not be able to continue paying the property taxes and insurance on the home, which could result in the home being foreclosed upon. The borrower may also face higher interest rates and fees than they would with a traditional mortgage.

On the other hand, there are also significant benefits to both life settlements and reverse mortgages. In a life settlement, the seller receives a lump sum payment that can be used for any purpose, which can provide much-needed financial assistance in retirement. In a reverse mortgage, the borrower can access the equity in their home without having to sell it, which can provide a stable source of income in retirement.

In summary, life settlements and reverse mortgages are both financial options that allow older individuals to access equity.